PHOENIX- California public power credits should remain strong through a "radical transformation" of the state's energy supply caused by legislative mandates to reduce greenhouse gas emissions, Fitch Ratings said Tuesday.

In 2006 California enacted a law that required a reduction to 1990 greenhouse gas emission levels by 2020, and legislation enacted this month requires a reduction in greenhouse gas emissions to 40% below 1990 levels by 2030.

"Driven largely by legislative initiatives requiring the expanded the use of renewable energy resources and a reduction in greenhouse gas emissions, the state's policy objectives are having a direct impact on utility finances and operations," Fitch said. "Thus far, California's public power utilities have risen to the challenge and preserved credit quality throughout the process, and Fitch expects this success to continue as the state pursues a new energy economy."

Beginning in 2006, the state's power utilities began changing to comply with two key components of the legislation – the renewable portfolio standard (RPS) and greenhouse gas emission reduction goals. The RPS is the main driver of the power supply transformation of public power utilities, Fitch said, as it requires power suppliers to generate or purchase a certain portion of the electricity sold to retail customers from eligible renewable resources. The standard began at 20% in 2013, rises to 33% in 2020, and reaches a maximum of 50% by 2030. According to the California Energy Commission, California supplied nearly 25% of its energy from eligible renewable sources in 2014, up from 10.6% in 2008.

"Complying with the myriad of environmental regulations has generally resulted in higher operating costs for California's public power utilities, which must be paid for by electric consumers," Fitch said. The higher costs are not only attributable to the addition of required renewable resources (including wind or solar generation) , but also result from legacy costs related to the ownership of, or contractual positions in, existing resources (coal and natural-gas fired generation and large hydro projects) that cannot be easily or quickly terminated."

While the declining cost of renewable energy and low natural gas prices have offset some of the cost increases, California electricity prices have managed to well outpace the nation, increasing 48% over the last decade according to the U.S. Energy Information Administration against a national average of only 32% over the same period.

"Public power utilities have generally passed the full cost of compliance through to consumers, which has resulted in higher electric rates, but preserved financial margins and credit quality through this period of transformation," Fitch said. "Fitch expects the trend of higher costs and full recovery to continue, and public power credit quality to remain strong through the second decade of transformation."

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